Discipline and Methodology
Are all Costs the same?
The real challenge for the Cost cutting practitioner is not just to find costs…as this is a small feat for any accountant able to read a P&L or ledger.
The problem is, instead, to separate Good Costs (those needed for the business to thrive) from bad – or suboptimal – Costs.
Failure to understand this basic difference will lead to the end shown with the man cutting the branch is standing on: often the most dangerous consequences for a company come from a badly designed cost cutting strategy.
This article illustrates a methodology that can be deployed by industrial enterprises to find effective ways of finding and, finally, cutting bad costs.
Why many cost cutting initiatives fail to deliver benefits?
One of the main reasons is the widespread use of purely accounting-based approach.
When a company finds itself in an enduring crisis, with profit/cash depleting at uncomfortable rate and with shareholders and banks asking for immediate countermeasures, the obvious and frequent approach is to look at the P&L, Ledgers, and other accounting statements, then list all expenses according to categories and, finally, envisioning targets of savings often constant across the board.
This approach has the following downsides:
- It fails to distinguish good and bad costs, leading often to the elimination of good costs
- It doesn’t consider the implication of cost cutting on the mission and strategy of the company
- It lacks much needed involvement of employees and stakeholders, thus higher probability of failure
What about a more holistic strategy?
Holistic is a term taken from a philosophy theory according to which Systems should be viewed as wholes, not just as a collection of parts.
One of the consequences of this theory is that the value of the whole system is higher than the sum of its parts.
Therefore, a holistic approach to a company’s costs should yield in fact more than the simple sum of savings of the single cost categories.
The following picture highlights the main steps of our holistic strategy to Cost Cutting and their correlation with achievable savings
The advantages of this comprehensive strategy are evident:
- Savings are not just the result of a negotiation strategy with suppliers on prices
- Higher savings due to sharpened focus on value added activities
- Better quality on inputs results in improved value of your product/services
- Doing more with less – Lean focus on processes
- Greater involvement of employees and stakeholders yields more probability of success
- Cost Cutting focuses only on bad costs
How can Advento help ?
We have a team of talented people very knowledgeable in the airline industry. As many know, airline industry is a very demanding benchmark on many areas, from engineering and maintenance to the information technology.
This experience can be also effortlessly applied to other industries giving the customer a fresh outside look on its area of improvement.
We have built a rigorous holistic methodology able to provide the client company with:
- Analysis of company’s financial/operational data
- Savings opportunities
- KPIs to measure success
- Project management to deliver results when they are needed